Dishman Pharma -Dismal performance; Cut earnings/target: Emkay

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Dishman Pharma

Dismal performance; Cut earnings and target price

HOLD

CMP: Rs174                                        Target Price: Rs181

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n     Q2FY11 was significantly below our expectations with          a) Revenues at Rs2.1bn (est. Rs2.2bn), EBIDTA at Rs369mn (est. Rs492mn) and APAT at Rs85mn (est. Rs205mn)

n     Performance was largely impacted because of continued underperformance in the high margin CRAMS segment and de-growth in the Marketable Molecules business

n     This is 12th consecutive quarter of dismal performance; management has revised revenue guidance downward from 15% to 10%

n     Delay in business recovery remains an overhang; poor H1FY11 leads to downgrade of earnings by 26% each for FY11E/FY12E; revise target to Rs181 and maintain hold

Results disappoint once again; 2HFY11 recovery to get delayed

Dishman’s Q2FY11 revenue at Rs2128mn (est. of Rs2171mn; down by 2% YoY) and

APAT at Rs85mn (est. of Rs198mn; down 56% YoY) was below our expectations. The

lower than expected performance was on account of a) subdued performance in the

high margin CRAMS segment due to lack of recovery in the regulated markets, b) 7%

YoY decline in the Marketable Molecules (MM) business, and c) currency depreciation

which has impacted the realizations and margins. De-growth in the CRAMS segment

was on account of 5% decline in sales from its top customer Solvay and subdued

performance in CA. Despite 41% increase in Quats business, the MM business for the

quarter declined by 7% largely led by 32% de-growth in Vitamin D business.

Going ahead, management has guided for a recovery in the business from 2HFY11E

onwards on the back of a) commencement of operations at China facility, b) execution

of order worth US$6.5mn in Q4FY11 for a European customer, c) commencement of

HIPO facility, and d) new contract signed with an MNC pharma player (has already

signed master supply agreements for the CRO/CMO business). However, we are of the

view that, recovery in base business will be gradual and expect operating environment

to improve in FY12E. Moreover contracts signed with MNC players would start

contributing meaningfully to the top line towards the end of 2HFY12E. On the back of

subdued performance in H1FY11, we are toning down our FY11E/12E earnings

estimates by 26% each.

EBIDTA margins crash 533bps to 17.4%

On the operating front, the company witnessed 26% de-growth in EBIDTA to Rs369mn on

account of lower contribution of high margin CRAMS business (CRO business) and lower

rupee realization. Increase in other expenditure (up 345bps YoY) and staff cost (up 158bps

YoY) further eroded the margins. Management has earlier indicated that its re-structuring

exercise at CA’s will help them to reduce the staff cost to the tune of CHF$8mn annually

from FY11E onwards. Although management is guiding for EBITDA margins to be around

23-24% levels, we believe they will remain subdued at 20-22% until there is an up-tick in

the business ramp-up. We expect EBITDA to clock FY10-12E CAGR of 8% to Rs2367mn

with EBITDA margin of 21.8% in FY12E.

APAT at Rs85mn led by overall deterioration in business

APAT registered a decline of 56% YoY to Rs85mn (APAT margin decline of 485bps) on

account of overall deterioration in the business. Further erosion in APAT was restricted by

3% reduction each in interest and depreciation cost and 196bps lower tax provisioning. The

Adjusted EPS for the quarter stood at Rs1.2 (against our expectation of Rs2.5). For

H1FY11, EPS stood at Rs3.3 against our full year EPS of Rs10.7.

Lack of visible upsides; downgrade earnings and target price

Vis-à-vis management’s expectation of a recovery in H2FY11, we believe that a meaningful

recovery may get delayed beyond Q4FY11E. On the negative front: a) revenues at

Carbogen Amcis may grow slower-than expected, b) delay in ramp-up from newly signed

contracts, c) lower than expected utilizations at the China and HIPO facility, and d)

possibility of Dishman missing 10% guidance in FY11 cannot be ruled out. Our conviction

gets further strengthened as the company’s other peers also reported a subdued

performance in Q2FY11.

On the positive front: a) Management has guided for recovery in H2FY11 and anticipates a

robust FY12, b) expects to garner US$35-40mn in peak revenues from the newly signed

contract with an MNC pharma company, c) commencement of operations at HIPO and

China facility, and d) EBITDA margin guidance of 23-24%.

Dishman Pharma continues to disappoint on revenues and earnings front. Though we do

believe that operating environment in the CRAMS space is going to ease out going forward,

we do not foresee immediate triggers for Dishman to get re-rated. The management has

lowered its revenue guidance for FY11E (from 15% to 10% and guided for 15% growth in

FY12E). In lieu of continued subdued performance, we downgrade our full year earnings

estimates by 26% each for FY11E and FY12E. Our revised EPS estimates now stands at

Rs10.7 for FY11E (Rs14.5 earlier) and Rs13.9 for FY12E (Rs18.7 earlier). Owing to

earnings downgrade, we cut our target price from Rs224 to Rs181 and maintain Hold rating.